The spinoff will be named Yum China, and focus on the US company's huge but struggling restaurant business in the country.
The rest of the global business, which currently counts 41,000 restaurants in more than 125 countries, will remain with the existing Yum, which will evolve into a "pure play" franchisor, with nearly all of its restaurants licensed to franchise holders.
"Following the separation, each standalone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies," said Yum chief executive Greg Creed.
"This will provide a clear investment thesis and visibility to attract a long-term investor base suited to each business."
The move came after Yum's 6,900 KFC and Pizza Hut restaurants in China have struggled for two years after a period of rapid expansion.
The company was hammered by a tainted meat scandal in China in mid-2014, which hit the bottom line of the entire company.
Global sales grew just one percent last year to $11.32 billion, and net income fell four percent to $1.05 billion.
Yum shares jumped 4.6 percent to $75.06 in pre-market trade after the announcement.
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